Whatever happened to Adam Smith's Invisible Hand?

In the proper functioning of a market, there's an invisible hand that adjust prices so that supply matches demand. If supply exceeds demand, prices fall. If demand exceeds supply then they rise. Did we not learn that at our mothers' knee? Of course we did. So what's gone wrong with cellular?

The revenue of most Mobile Network Operators is flat or falling, and yet demand for their services, in terms of data volume at least, continues to increase at around 60% a year.

Since, as everyone agrees, cellular service is still patchy (especially if you're in Europe), should not prices rise even faster than the cost of supply so that the demand might be dampened, and the Mobile Operators might have some profit they could spend on updating their networks?

Don't be silly.

Operators can't let prices rise, at least in Europe, since they know their market share will die and they with it. They choose a slower death, of slashing costs, of restructuring, of selling non-core assets, of consolidating. And yet, maybe not so slow. The removal of intra-European roaming charges in the middle of this year, beautifully aligned with the European vacation season, will stimulate demand and drive up costs with no matching revenue. Who would be a Mobile Operator?

Let me stir some other factoids into the soup. The US serves a population of just under 400m people from four main operators. The western EU serves a population of about 450m with over forty independent operators and groups.

And with the removal of intra-European roaming charges, it becomes affordable for me to buy a subscription in one country and use it day-to-day in another, and improve my coverage experience while I'm at at. At least it would be, if the UK were still in the EU long-term, but that's another story.

All this signals a big change ahead for cellular in Europe.

I mentioned earlier that Mobile Network Operators are selling their non-core assets to manage their costs. It may surprise you to learn that one of the non-core assets that many have already sold (and many more are thinking of doing) is the Mobile Network itself, especially the Radio Access part. Why are they doing this? Because actually it's much cheaper to run a network if you share it, and cheaper still if you can virtualise it so that everyone's network is essentially software running in the same server farm. This is the Neutral Host. What's left is your brand, your subscribers and their Quality of Experience. The Neutral Host minimises your cost base, and the Mobile Operator can focus on what it does best. In the not too distant future, the Neutral Host will manage the spectrum assets and QoE on behalf of the Mobile Operator as well. And when you free the Operator from the Network, they can provide lots of other value added services as well. But that's getting speculative. All that I've described so far is already in motion.

Adam Smith's invisible hand has not disappeared, but it has been transplanted to a new body. With price levels driven to famine-survival levels for operators, it has no hope of matching supply to demand. Instead, it will drive the emergence of four or five pan-European Neutral Host providers, with the existing Mobile Operator names persisting as customer facing brands. With the economies that come with scale, the Neutral Host providers can survive and thrive. They can provide a backbone to support both the consumer-oriented value brands, and the professional-oriented performance brands. Customers will get the service they want at the price and quality they want, and the Neutral Hosts and their suppliers will be able to afford to innovate and deliver the solutions that meet the 60% annual demand growth. There will be groups who would block such a transition on various grounds, but let them preside over an industry of the starving. We should remember something else Adam Smith said,

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."

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